Thursday, March 23, 2006
Coca-Cola’s Suit in Early ’30s Was Opening Shot in War With Pepsi
By ROGER M. GRACE
“Coke, please,” a young man would call out.
The waitress would take the order and return with a glass filed with a beverage that tasted like a Coke and had the brown coloring of a Coke. But it wasn’t a Coke…it was a Pepsi.
The time period was 1931-32, and the place was New York City and its environs—a region in which Pepsi-Cola had only recently been introduced. (The drink was first served at a soda fountain in North Carolina in or before 1893, initially dubbed “Brad’s Drink,” after its creator, druggist Caleb Bradham, and was well-established by 1931 in some locales, particularly in the South.)
The customer in the above scenario was, in actuality, one of a cadre of law school graduates acting as investigators for the Coca-Cola Company, a Delaware corporation headquartered in Atlanta, Ga.
That company, based on the observations of its sleuths, brought suit in the Court of Chancery of Delaware for an injunction against Loft, Inc., a New York corporation which controlled and managed three chains—with about 130 stores, collectively—where the cola-switching practice was alleged to be occurring.
The president of Loft, Inc., Charles G. Guth, and some of the company’s other officers happened to own a major chunk of the newly formed Pepsi-Cola Company, incorporated in Delaware in August 1931. Guth’s son-in-law was in charge of managing that cola-making concern. The purchase of Pepsi’s trademark and secret formula, for $10,000, was made from a trustee in bankruptcy. (The 1931 bankruptcy of the National Pepsi-Cola Company came eight years after the original Pepsi-Cola company, founded by Bradham, went under as the result of unstable sugar prices.) Guth engineered the transaction after he became irate that the Coca-Cola Company would not grant Loft a hefty discount based on the high volume of Coke syrup it was buying (more than 30,000 gallons annually).
As of Sept. 26, 1931, none of the soda fountains at Loft-controlled outlets sold Coke. The Coca-Cola Company introduced evidence of 625 instances after that date where Pepsi was passed off for Coke at 44 stores.
Nonetheless, Delaware Chancellor Josiah O. Wolcott declined to inflict on the defendant the “stigma of an injunction” inasmuch as the evidence showed that Loft, Inc. had, in fact, instructed its waitresses and soda jerks not to substitute Pepsi when an order was placed for Coke. Going beyond that, it had actually required them to sign an oath that they would not do so.
Wolcott was miffed that Loft hadn’t fired employees who had breached the oath and, although he outright denied the relief sought by the plaintiff Coca-Cola Company, said in his written opinion:
“As to costs, it seems to me they should be imposed on the defendants. But I am willing to receive the views of the solicitors upon that question before finally determining it.”
That Delaware opinion, rendered on June 6, 1933, is of scant legal significance today. Its import is that it represents the opening shot in what has come to be known in much more recent times as the “cola wars” between Coke and Pepsi.
Taking the offensive, the Pepsi-Cola Company set out to establish that any substitutions of its beverage for another cola that had been specified by a customer were absolutely not countenanced by it. It placed ads saying:
“$10,000 reward will be paid by the Pepsi-Cola Company for information leading to the detection of any dealer substituting Pepsi-Cola for any other five cent drink.”
The Coca-Cola Company responded, in essence, “Okay—pay us.” It had pointed to instances where such substitutions had been made.
Pepsi didn’t pay, and the Coca-Cola Company sued in the Superior Court of Delaware for New Castle County. On April 16, 1934, a demurrer was sustained by Richard S. Rodney, an associate justice of the Delaware Supreme Court who doubled as a trial judge.
Rodney, who later became a U.S. District Court judge for Delaware, declared that findings in the Chancery Court action were res judicata. While he didn’t bother to apply the legal precepts he spouted to the facts at hand, what Rodney apparently had in mind was that the chancellor had found that the substitutions were the unauthorized acts of the waitresses, and not the dealers. The ad sought “detection of any dealer substituting Pepsi-Cola.”
More litigation between the companies was to come.
Copyright 2006, Metropolitan News Company
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